Watch the Hedge Funds

It is a $2.6 trillion industry and it’s not rich "fat
cats" money. Pension funds are major clients as well. Hedge funds are in a
tough bind right now. As one major fund manager said when futures were reacting
positively to news of the rate cut this morning, "Today not a soul is
expecting a market turn to hold."

Hedge funds are at their lowest level in more than 20 years.
Most hedge funds have been facing frantic massive redemption from clients during
the last three months and are being forced to sell what had been winners. Big commodity-based
companies -- those that have seen huge spikes in stock values -- are taking
massive hits on renewed concerns of a global slowdown.

Hedge fund average returns fell nearly 5 percent last month --
the biggest loss in 10 years. Year to date, they are down nearly 10 percent.
Most of these managers charge a high fee, 2 percent annual management fee, a 20
percent cut for any profits. Seeing as they have only 2 1/2 months left in the
year to prove themselves, the clock is ticking. One analyst predicts that 10
percent of the 10,000 hedge funds in business may be gone by early next year due
to investor liquidation.

This morning they were carefully watching the market's
reaction to news of the rate cut. Had they seen a sustainable positive
response, they would have been covering their bets. Because the underlying view
was that this rate cut did not have legs, hedge fund investors turned back toward
their redemption spree. If they sense a turn in sentiment, they will start
covering up their shorts as quickly as they sold them off. Their actions will
likely be quick, fast and seemingly irrational.